Business Context and Reporting Period
Company: KNOT Offshore Partners LP
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter and six months ended June 30, 2020
Business Overview: The Partnership owns and operates a fleet of 16 shuttle tankers under long-term time and bareboat charters with major international oil companies. As of June 30, 2020, the fleet operates under contracts expiring between 2020 and 2032.
Key Financial Metrics
| Metric (USD in thousands) | 3 Months Ended June 30, 2020 |
6 Months Ended June 30, 2020 |
|---|---|---|
| Total Revenues | $70,259 | $138,083 |
| Operating Income | $33,359 | $61,789 |
| Net Income | $21,683 | $15,544 |
| Net Income Attributable to Common Unitholders | $19,515 | $11,723 |
| Earnings Per Unit (Basic) | $0.597 | $0.359 |
| Cash and Cash Equivalents | $41,436 | $41,436 |
| Total Debt (Current + Long-term) | $953,673 | $953,673 |
| Net Cash Provided by Operating Activities | N/A | $80,789 |
Note: Total Debt calculated as Current portion of long-term debt ($83,523) + Long-term debt ($870,150).
Material Changes vs. Prior Period
- Revenue: Six-month revenues decreased by 3% ($4.0 million) compared to the prior year, primarily due to reduced revenue from the Raquel Knutsen (planned drydocking) and the Bodil Knutsen (reduced daily rate). This was partially offset by an extra operational day due to the leap year.
- Net Income:
- Q2 2020 vs Q2 2019: Net income increased significantly by 165% ($13.5 million), driven largely by a reduction in unrealized losses on derivative instruments ($7.2 million improvement) and lower interest expense ($4.7 million reduction) due to lower LIBOR rates.
- YTD 2020 vs YTD 2019: Net income decreased by 26% ($5.5 million). The decline was primarily caused by a $10.5 million increase in realized and unrealized losses on derivative instruments due to decreases in US swap interest rates.
- Operating Expenses: Vessel operating expenses decreased by 14% in Q2 and 3% YTD, attributed to the strengthening of the U.S. Dollar against the Norwegian Kroner (NOK).
- Interest Expense: Decreased by 35% in Q2 and 29% YTD due to lower average LIBOR rates and decreased leverage.
Guidance, Outlook, Risks, and Unusual Items
- Charter Expirations: The time charter for the Windsor Knutsen (Shell subsidiary) expired in October 2020 as the charterer did not exercise its extension option. The Partnership is exploring re-chartering options, including a potential six-month charter with a KNOT subsidiary.
- COVID-19 Impact: The outbreak has created uncertainty regarding oil demand and shipping requirements. While no material service interruptions have occurred, the Partnership anticipates higher crewing expenses and potential operational challenges due to travel restrictions. There is a risk of off-hire claims if an outbreak occurs on board.
- Liquidity: As of June 30, 2020, available liquidity was $70.1 million (cash of $41.4 million plus $28.7 million undrawn revolving credit facilities). Management believes resources are sufficient for the next 12 months.
- Derivative Instruments: The Partnership utilizes interest rate swaps to hedge variable rate debt. Unrealized losses on these instruments significantly impacted YTD net income. As of June 30, 2020, the notional amount of outstanding interest rate swaps was $627.1 million.
- Distributions: A quarterly cash distribution of $0.52 per common unit was paid on August 13, 2020, for the quarter ended June 30, 2020.
Investor Verification Checklist
- Re-chartering of Windsor Knutsen: Verify the status of negotiations for the Windsor Knutsen following the October 2020 charter expiration to assess potential revenue gaps.
- Derivative Exposure: Review the sensitivity of net income to further declines in interest rates, given the significant unrealized losses on interest rate swaps reported in the period.
- Debt Maturity Profile: Confirm refinancing plans for debt maturing in 2021 and 2022, particularly in the context of current market volatility and lower unit prices making equity issuance less viable.
- COVID-19 Operational Costs: Monitor for increases in crewing and maintenance costs due to pandemic-related restrictions and potential off-hire events.
- Covenant Compliance: Verify continued compliance with financial covenants (e.g., minimum liquidity, book equity ratio, EBITDA to interest ratio) across all loan facilities, especially given the impact of unrealized derivative losses on reported earnings.